The "Inter Vivos" Issue: Gifting Yourself Doesn't Avoid Co-op Transfer Rules

Around 2009, Xenakis transferred his stock in Aries to a friend, Georgios Anastasakis. Xenakis died on March 24, 2010, and Anastasakis claimed that he did not know Aries (and thus he) owned the apartment; he learned this when going through Xenakis' documents. Anastasakis did not want to live in the apartment and wanted only the right to sell it, subject to approval by the board. The co-op, however, refused to acknowledge the transfer to Aries. 

Aries to the Ramparts

Aries sued. The co-op argued that Xenakis did not follow the co-op's rules when he arguably assigned the shares and lease to Aries, and noted that the bylaws and proprietary lease provided that no transfer or assignment would be effective unless the shareholder met certain requirements, including payment of transfer taxes, and obtained the consent of the co-op.

Xenakis did none of that, Aries claimed, because it would have been futile, since Xenakis knew the board had a policy by refusing ownership by corporations. Yet since the co-op had no explicit prohibition against an entity owning an apartment in the bylaws, Aries challenged that this unwritten rule was arbitrary.

The court rejected this argument, noting that judicial review of a co-op board's policies was deferential and that it was akin to the  Business Judgment Rule, in which courts exercised restraint and deferred to decisions made by the board provided that the board acted for the purpose of the co-op within the scope of its authority and in good faith.

Aries did correctly argue that per the lease, the board could not "unreasonably withhold" its consent to a transfer. However, Aries did not show any reason why the board's refusal to approve assignments to corporations was unreasonable.  The court noted the co-op's several legitimate reasons for its policy to not allow entities to own: Corporations would use apartments to house directors or officers, who would be transient tenants and whose residency would be contrary to the co-op's goal of having residents of a permanent nature. The co-op was also concerned about accountability and liability when there was a corporate, rather than individual, shareholder/tenant.

The court determined that the co-op's concerns were valid. There was no reason to strike down the co-op's policy or to require it to make an exception for Aries. The court also explained that Aries offered no evidence of bad faith.

Beware of Greeks Bearing Gifts

Aries then raised another issue: that, as owner of the apartment, Xenakis had the right to transfer the apartment as an "inter vivos" gift without the approval of the board.

In order to prove an inter vivos gift, the person claiming the gift must have demonstrated (i) an intent on the part of the donor to make a transfer; (ii) delivery to the donee; and (iii) acceptance by the donee. The delivery had to be done in such a way as to vest the donee with control and dominion over the property. The court explained that while symbolic delivery was sufficient, it had to proceed to a point of no return, i.e., in the corporate context there had to be a transfer shown on the stock books of the corporation.

Aries apparently argued that, because Xenakis owned Aries, delivery was not necessary because the transfer to Aries constituted a delivery to himself. The court rejected that argument, however, and determined that there was no issue of material fact concerning whether Xenakis made a valid inter vivos gift to Aries. He did not.

Accordingly, the court granted judgment to the co-op and dismissed the case.

Comment: This case reminds us that, unless a share transfer is recorded in the corporation's books and records, the corporation will not be required to acknowledge the transfer. The lease provision here apparently required the board to "not unreasonably withhold" its consent to a transfer, which is a provision we do not normally see in the context of transfers; more often, boards can withhold consent for any reason or no reason, absent discrimination. Notwithstanding, the court applied the Business Judgment Rule and determined to give deference to the board's longstanding, yet apparently unwritten, rule that prevented corporations from owning shares.

This case is a good reminder that co-ops need to exert control over their shareholders and, to a degree, those people who are entitled to live in the building. Shares may not be sold freely and shareholders must comply with the provisions of their co-op's governing documents in order to make sure any transfer is effective for the protection of all shareholders because of their economic interdependence.

Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan.  Dale J. Degenshein is a special counsel for that firm.

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